New High New Lows

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New Highs and New Lows represent the number of all stocks making the new 52-week highs or lows. The New Highs/Lows indicators belong to a group of Breadth indicators or Advance/Decline based indicators and are used in technical analysis to evaluate sentiment of the basket of stocks.

Originally applied to the NYSE (New York Stock Exchange) the Breadth indicators were used to define the U.S. stock market sentiment. At the current moment the New Highs and New Lows are used on different basket of stocks, including but not limited to the NASDAQ 100, S&P 500 and DJI indexes to describe the sentiment of various stock market sectors.

The New Highs and New Lows calculations are simple. New highs represent the number of stock reaching new 52-week highs and the number of New Lows represents the number of stocks traded at new 52-week lows.

In technical analysis New High/Lows are analyzed as individual indicators as well as in combination together. The New Highs/Lows Oscillator and New High/Lows Ratio are well known and often used to define overbought and oversold levels.

The New High/Lows Oscillator is calculated by the following formula: 

New High/Lows Oscillator = New Highs - New Lows

and the New Highs/Lows Ratio is calculated: 

The problem with the formula above, is that on a backed with small number of stocks in most cases the oscillator value is either -100%, or 0% or +100%. This formula works well on such indexes and NYSE Composite, S&P 500. Yet it becomes difficult to apply the New Highs/Lows Ratio to Dow Jones Industrials and even NASDAQ 100 indexes. Furthermore the simplified formula which uses an absolute value instead of percentage value could be used: 

Chart 1: S&P 500 index - New Highs and New Lows indicators.

Investors and technical analysts study New Highs/Lows indicators to see whether they are confirming or diverging from the underlying price movement. When the underlying index (basket of stocks) price moving average rises and the number of 52-week Highs increases (New High/Lows oscillator and ratio move up) then investors consider that the New Highs confirm the bullish market. Vice versa, during the down trend, the increasing number of New Lows would confirm the bearish trend.

Chart 2: S&P 500 index - trading New Highs and New Lows Ratio.

The divergence in between the price trend and the New Highs & New Lows movement could signal a possible change in the market sentiment and as a result may lead to the changes in a trend direction. For instance, a scenario when during an up-trend the number of New Highs started to decline (New Highs/Lows oscillator and ratio starts to move down) may signal a possibility of coming down-turn. At the same time, a situation when during the decline the number of New lows starts to decline (New Highs/Lows oscillator and ratio starts to move up) may signal a possibility of coming recovery.

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